Why Pakistan is trapped in a loop of economic crises and foreign bailouts
The recent escalation in tensions between India and Pakistan, following Pakistan-backed terror attacks killing pilgrims in Pahalgam, has further darkened the outlook for Pakistan’s already fragile economy.
Pakistan’s economy has been on a downward trajectory in the post-COVID years, grappling with multiple challenges that have hindered growth.
The nation's GDP growth has been erratic, inflation rates have soared, and structural issues such as high inflation, narrow tax base and energy shortages are impeding the futuristic outlook. Political instability and geopolitical tensions further exacerbate economic vulnerabilities.
Pakistan has long depended on financial aid from the International Monetary Fund (IMF), having entered into 24 loan programs since 1958.
This repeated cycle reflects deeper economic weaknesses—like a limited tax base, excessive public spending, and a persistent failure to implement meaningful reforms. The latest bailout, a $7 billion deal approved in September 2024, comes with tough conditions: raising the tax-to-GDP ratio, slashing subsidies, and cutting administrative expenses to restore some economic stability.
However, the underlying problems persist. More than half of the government’s annual budget goes toward paying interest on debt, leaving little room for investment in growth or public services. The energy sector remains inefficient, and repeated hikes in power tariffs have hurt both industry and exports.
At the same time, Pakistan’s growing dependence on foreign lenders, particularly China, raises alarms over its long-term debt sustainability. Although leaders claim this IMF loan will be the last, there is widespread doubt given the country's track record of backtracking on reform promises. Without bold, structural changes, Pakistan is likely to remain trapped in a loop of economic crises and foreign bailouts.
Despite modest growth of 2.4 percent in 2024 after a 0.6 percent contraction in 2023, the core issues like volatile forex reserves, costly energy imports, and a narrow export base persist. During the last six years, Pakistan GDP grew at an average growth rate of 2.4 percent, the size of the GDP is also stagnated between $320 billion to $375 billion during the last six years.
Pakistan's trade deficit soared high at $44.97 billion in 2022 due to high imports. While exports have stagnated, the trade deficit remains substantial, reflecting persistent external sector vulnerabilities. Exports remain stagnated between $30 billion to 39.5 billion between 2019 to 2024
Pakistan has grappled with escalating inflation, reaching a record 29.2% in 2023. Although it moderated to 23.4 percent in 2024, the average inflation rate over the past four years remains elevated, significantly higher than regional peers.
The high inflation has eroded purchasing power, increased the cost of living, and contributed to social unrest. Efforts to control inflation through monetary policy have had limited success, highlighting the need for structural reforms.
The unemployment rate in Pakistan rose to 8.5 percent in 2023, up from 6.34 percent in 2021. This increase underscores the economy's struggle to generate sufficient employment opportunities, particularly for its burgeoning youth population.
The lack of job creation has led to increased poverty and social discontent. Addressing unemployment requires targeted policies to stimulate economic activity and support small and medium-sized enterprises.
Pakistan's foreign exchange reserves have been under pressure due to high debt repayments and a persistent current account deficit.
As of March 21, 2025, the State Bank of Pakistan's reserves stood at $10.61 billion, down from a three-year high of $18.7 billion in November 2024. The decline in reserves has limited the country's ability to import essential goods and has increased vulnerability to external shocks. Efforts to bolster reserves through IMF assistance and other financial instruments are ongoing, but structural reforms are necessary to achieve long-term stability.
The recent escalation in tensions between India and Pakistan has cast a fresh shadow over Pakistan’s already fragile economy.
Heightened geopolitical risk has triggered capital flight, further weakened investor confidence, and put pressure on the Pakistani rupee, which was already under strain due to a widening fiscal deficit and ballooning external debt.
The uncertainty has also dampened stock market sentiment, with foreign institutional investors pulling back amid fears of conflict escalation.
Trade disruptions along the border and reduced regional cooperation could hit Pakistan’s exports, particularly as India is a key player in South Asian trade. Rising military expenditures in response to the tensions divert valuable fiscal resources away from development, infrastructure, and social programs—at a time when Pakistan is already struggling to meet IMF bailout conditions involving spending cuts and revenue reforms.
Furthermore, the threat of sanctions or diplomatic isolation by India and its allies could limit access to global markets and financing. This is especially risky given Pakistan's dependency on external debt and inflows from friendly nations like China and Gulf countries. Without de-escalation and diplomatic resolution, prolonged tensions with India could accelerate economic decline, disrupt recovery efforts, and exacerbate inflation and unemployment in Pakistan. Stability is critical for economic rebuilding and restoring investor trust.
Pakistan's economic outlook remains uncertain. While recent IMF assistance provides short-term relief, structural issues such as a narrow tax base, energy shortages, and political instability persist. Geopolitical tensions, particularly with neighbouring India, further exacerbate economic vulnerabilities. Without comprehensive reforms and improved governance, Pakistan's economy may continue to face stagnation and external dependencies.
Addressing structural deficiencies, enhancing fiscal discipline, and fostering political stability are imperative for the growth revival. The country needs comprehensive reforms to improve governance, diversify the economy, and strengthen institutions.
Without decisive action, the nation risks prolonged economic hardship and diminished prospects for its people. Support from IMF can only provide temporary relief, but long-term stability depends on domestic policy choices and the government's commitment to reform.
